Retail feared that insiders would dump Optimism’s $500m token unlock — so they mass dumped it first

When $500 million of Optimism’s OP tokens vested last week, analysts expected the builders and venture capitalists of the buzzy blockchain to make a killing. That’s because they were first in line to rake in proceeds from the “unlock” or scheduled release of non-circulating tokens.

No surprise, smaller holders of OP were anxious the new supply of tokens would drag down the value of their own positions.

But then a funny thing happened — the retail investors dumped their tokens ahead of the unlock, according to Riyad Carey, a research analyst at crypto research firm Kaiko. OP lost a quarter of its value between May 7 and Monday. It skidded another 2.7% after the US Securities and Exchange Commission sued Binance on June 5, sinking the crypto market across the board.

Carey said it appears investors were so wary of a downturn they dumped their positions prematurely.

“The price pressure has thus far been mostly in anticipation of the unlock rather than from those who received the unlock,” Carey told DL News.

Supply increases

Te episode highlights a little understood area of crypto — vesting. The vesting schedules in crypto are usually flagged before a token launches and this has led to some unusual arrangements, as well as criticism from those who worry they are an opportunity for “insiders” to benefit at the expense of retail investors.

And no wonder. This unlock process can dramatically increase the supplies of tokens. The circulating supply of Optimism’s OP token more than doubled on May 31. The circulating supply of 1INCH, the token of the decentralised exchange aggregator of the same name, jumped 30% Friday.

Now investors are bracing for a potentially volatile month: unlocks will inflate the supply of several popular tokens in June. Tokens for Sui, an Ethereum competitor, and Blur, the red-hot NFT marketplace, are also set to see a large increase in supply this month.

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In the short term, that means pain for their investors.

“Token unlocks increase the supply side of the equation, so unless there is a corresponding increase in demand, it is natural that it will create short-term downward pressure on the price,” Greg Moritz, Co-Founder at crypto hedge fund AltTab Capital, told DL News.

But that pain is just as likely to be self-inflicted, according to research from Token Unlocks, which tracks crypto vesting schedules.

Token prices typically fall in the month leading to an unlock, according to research published in Token Unlocks’ 2022 year-in-review. In the month after a token vests, its price is relatively flat.

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Another half-billion worth of new tokens are scheduled to vest in June, according to Token Unlocks. Whether those tokens also suffer a short-term price decline will depend on myriad factors, analysts told DL News.

To be sure, Kaiko research published earlier this year found that sell pressure is strongest when unlocked tokens go to early investors.

“Their primary goal is profitability,” the firm wrote in its newsletter early this year, “whereas users of the project and employees are more likely to hold.”

Another half-billion worth of new tokens are scheduled to vest in June.

—  Token Unlocks

That dynamic has occasionally prompted criticism on social media. But Matt Batsinelas, the founder of analytics platform Glass Markets, said retail investors shouldn’t complain.

“I think as long as retail investors are aware of [unlocks] then it’s not a big issue,” he told DL News. “That’s the risk they take on.”

SUI has a fixed supply of 10 billion tokens, but just over 550 million are currently unlocked. Another 61 million came online Saturday as part of a vesting schedule that starts with modest monthly increases in supply.

Vesting cliffs

SUI’s price has fallen more than 22% in the last seven days compared to a 7.5% decline for Bitcoin. But it could fall much further in November, when its circulating supply will jump from 800 million to more than 2 billion. Most of that increase will go to the blockchain’s “early contributors.”

Other large increases scheduled for June include Aptos’ APT token, Blur’s BLUR, and BitDAO’s BIT.

Not all vesting cliffs lead to price declines. In January 2021, Solana’s SOL token rallied after its circulating supply increased fivefold.

“Well known and telegraphed unlocks do not play out as one would expect,” Will Sheehan, founder of Parsec Finance, told DL News. “But also many unlocks quietly lead to prolonged selling.”

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If anything, the past year has shown that investors should be wary of billion-dollar tokens with low float, he said, referring to the amount available for investors to trade.

There are two ways to value a token. One is to multiply its value by the number in circulation. Tokens with a fixed supply can be valued by multiplying their values by the number that exist, whether locked or unlocked. The former is called market capitalisation. The latter, fully-diluted valuation.

During the last bull market, some insisted that it did not matter whether there was a large gap between a token’s market capitalisation and its fully-diluted value, Sheehan said. The biggest purveyor of that theory? Sam Bankman-Fried, the disgraced founder of bankrupt crypto exchange FTX.

Bankman-Fried and associated promoted tokens such as SRM, MAPS, and, of course, FTT, the one that led to FTX’s downfall. All had a low market capitalization and high FDV.

“Token supply did catch up to them,” Sheehan said. “Just slowly.”